Currency area is defined as the domain within which exchange rates are fixed (Mundell/1961). The benefits of a common currency are mainly microeconomic efficiency gains because of absence of transaction costs and ER risks and the costs are mainly macroeconomic loss of instrument of economic policy and adjustment mechanism. There is a difference between interregional adjustment and international adjustment even the exchange rates are fixed.

The theory of optimum currency areas is important for analyzing European monetary unification. OCA theory that focus on asymmetric shocks, labor mobility and the transactions value of a single currency subsumes some relevant considerations on the decision of whether to fix the exchange rate or form a monetary union. It has some difficulties to move from theory to empirical work and policy analysis. OCA theory focuses on characteristics which make stable exchange rates and monetary unification more or less desirable.

Europe Simulator

Exchange rates display, seen at Suvarnabhumi Inter...

Best Money Exchange Rate for Cash

The most important of these are asymmetric shock to output, trade linkages, the usefulness of money for transactions, the labor mobility and the extent of automatic stabilizers.

A simple model

The starting point for Mundell's analysis is an asymmetric disturbance on the demand side. Suppose A and B are countries with national currencies. This disturbance is characterized by a demand shift away from the good which is produced in country A to the good which is produced in another country B (see figure 1.1). The adjustment process is under the assumption that the nominal wage rate and the price of other inputs remain constant. And another important assumption is that labor is completely immobile between the countries A and B. The shift of demand from A to B causes additional unemployment in A and leads to upward pressures on its price level in B.

More Economics essays:

... currency area. In his earlier works Mundell have developed the idea of the optimum currency area (1961). He presumed that agents in the private sector did not try to anticipate future movements in the price level, interest rates, the exchange rate, or in government policy ...

... exchange rate, and full capital mobility but not monetary policy autonomy. Paper money was used as surrogate representation of gold which could be converted into bullion at a fixed rate. Therefore, there was only one true currency, gold, which was represented by 'different' national currencies ...

... Theory of Monetary Integration The criterion for a monetary union lies in the theory of optimum currency areas (OCAs). As a rule, the more the member states resemble the regions of a single country, which do share a common currency, the greater the possibility that they will derive net gains ...

... exchange rate instrument to take guard against asymmetric shocks, and in the light of a high degree of goods market integration but limited labor mobility as discussed in the section above on "optimum currency areas ...

47 pages20May/20100.0

Students & Profs. say about us:

"Good news: you can turn to other's writing help. WriteWork has over 100,000 sample papers"